Economics of Hungary in the Postwar Period

Updated on May 29, 2013

Economics and
business went through radical changes in Hungary during the twentieth century.
First communism and its collectivistic policies ruled over the lives of both
businesspersons and the people. Since officially announcing the freedom of
Hungary on October 23, 1989,
Hungary is experiencing the longest and most democratic period of freedom in
its twentieth century history.

Thanks
to a so called three-year-plan, which was accomplished in only two and a half
years, a tremendous growth resulted in the Hungarian economy, especially in
manufacturing and other industries. The industrial production output in 1949
was 28% higher than that of the last peaceful year before World War II. Heavy industry grew by more than 66%. This growth of production is due mostly to
the reconstructions. The main reason for it is the fast growth of the
industrial assets, which was almost 20%, and two thirds of this growth from the
growth of the number of workers. By
1949, the transportation system also recovered. Traffic on both railways and
roads was 1.5-2 times as much as that before the war.

The
improvements funded by the government regarded almost entirely the heavy
industry. Ninety percent of all government expenditures went to this branch. MDP’s (Hungarian Workers’ party, which was
the only party during the communist era in the country) favorite saying and
policy was that Hungary should be made the country of iron and steel. At the
same time, investment plans into agriculture were about 15%, of which only half
was carried out.

This lack of investments into
agriculture could be seen in the slow introduction of machines in the sector.
This resulted in a reduction of production output of agriculture by 15
percents.

During the three-year-plan welfare
and the standards of living also grew quite considerably, but, except for a few
sectors, it was still lower than before the war. The main cause of this welfare
improvement is undoubtedly due to the dramatic decrease of unemployment.

In
1949, the private sector was collectivized. An act in December of that year did this for plants employing at least
ten workers, and regardless to the number of employees, all presses and
electricity works. At the same time, the party and the government agencies
tried to outdo the regulations and did the same thing for most of the retailers
and the small-scale industries. Collectivizing these small companies was more
of a political decision than an economic one. This is because by this time the
governmental sector was so widespread, that it was not necessary to do it.

On
April 3, 1949, the MDP, which was the communist party and also the only party,
made the first five-year plan public. This
plan wanted to further improve heavy industry in Hungary and catch up with the
West’s industry. It calculated with 35 billion forints, of which 17 would have
gone to industry, 6-6 to agriculture and transportation, 2.5 to construction of
houses, and 3.5 for social and cultural purposes. Output of the industry had to increase by 80% in 5 years, which would
have been 230% of 1938’s production. The standard of living was planned to
improve by 35%. By the second half of 1950, due to the extensive investments
into the industry, there was a shortage of workforce. Six hundred and fifty thousand people
previously being in agriculture were forced to work in heavy industry. This resulted in a lack of workforce in
agriculture, which was eased by women starting to work. Because living
conditions were hard, these women sometimes took up jobs that meant strenuous
work physically. Mobilization of the workers was not organized well, so only a
small portion of the workmen stabilized and stayed at one workplace for a
longer time. It caused productivity and output to drop considerably.

International
events like the formation of NATO in1949, urged the modification of this
five-year plan to be able to modernize the army in Hungary. Due to high expectations in Moscow of the
quality of the army, investments in the army grew to 14.3% in ’49, 16.1 in ’50,
and 18.2% in ’51. The investment
plans into the war industry was actually higher than what could be carried out
in reality, since these expenses exceeded GNP (which is the total output of a
country) by almost 20%. After
this, the party made one bad economic decision after another. This extensive
improving of the army restructured economic policies. Heavy industry no longer
enjoyed special treatment, except for those branches that were related to
producing war and army equipment. This policy finally failed, because the plan
to modernize the Hungarian army failed.

The
forced industrialization had a very good effect in decreasing the economic gap
between Budapest and other cities in Hungary. Also during this time several
cities were founded, such as Dunaújváros, Komló, Kazincbarcika,
Oroszlány, and Várpalota. Plants and factories were also introduced into cities
that were underdeveloped industrially, such as Békéscsaba, Kiskunfélegyháza,
Debrecen, Gyöngyös, Szolnok, Jászberény, Hódmezővásárhely, Zalaegerszeg,
Nyíregyháza, Gödöllő, Veszprém, and Kaposvár.

On December 31, 1945, there were 180,087 private artisans with 141,955
employees.
By February 1, 1953, their number reduced only to 46,199 and 5,212
persons. In Budapest, there were 11,396 and 34,803 in the country. In 1950, private entrepreneurs did 30% of
all retail sales. By the end of 1952 this figure was only 1%.

During
the first stage of industrialization the number of workers grew by about
400,000 people, which was about 50%. The
previously unemployed masses, primarily women, started to work. More and more
workers in agriculture started to work at industry. The percent of workers in
five years decreased from 54.5 to 43%. Unemployment, a problem in Hungarian society for decades, was solved in
only a couple of years. Besides employment, the introduction of waged
vacations, family aid, social insurance, and pension was a major
accomplishment.

In
1953 the overall production of agriculture was somewhat higher than the ten
years’ average before the war, but in some cases it was lower. At the same time, during the years before
1953 the quality of production changed very unevenly. In1951 there were 9.7
tons of wheat, (7.1 in 1952), 9.3 tons of barley (7.5 in 1952), 14.1 tons of
corn (6.4 in 1952), 58.1 tons of potatoes (30 in 1952), and 132 tons of
sugar-beets (67 in 1952) produced per acres.The breeding of animals was even worse. Output of animal breeding mostly
decreased between 1950 and 1953. In 1950 there were 23.8 domestic animals per a
hundred acres. In 1951there were 21,4, in1952 22.6, and 23.9 in 1953, which is
only a few more. The losses of
1951 and 1952 were mainly caused by the low prices of the domestic animals, and
the lack of hay, which resulted in the mass starving and death of ten thousands
of pigs and sheep, and thousands of cows and horses. This caused the inability
of the producers to meet the demands, which in turn decreased the standards of
living, which resulted in growing dissatisfaction with the system, causing more
political instability. These problems of course could not be solved by mere
strong governmental actions.

In
1957, after the revolution there were lots of changes in the policies of the
government concerning Hungary’s economy. Politicians started to see that they
cannot force the people to do everything the party wanted. There was a little
more freedom and the WHOLE economy as a whole was planned to improve.

The
government planned to help the formation of new “termelő szövetkezet” production organizations, or “tsz” as they are commonly referred to, and
to strengthen the already existing ones both politically and economically. It
was important that these organizations manage businesses better and provide
higher standards of living for their members than the “private” businesses. The
government worked out a plan to modernize and increase the production of
agriculture. These new actions were welcomed and soon produced fruit. The
production organizations had great accomplishments. They started to work the
land by modern machines. This caused the production organizations to produce
more than others by 10-20%.They
were better in breeding too. While in 1957 there were 13.7 domestic animals per
acre, in 1958 there were 17.3. In 1955 there were 1790 liters of milk per cow. In 1957 there were 1980, and in 1958 there
were 2380 liters of milk from each cow. The living standards of members of
these organizations in 1957 grew by 12% and by 11% in 1958. The production
organizations started to have good a reputation. During the next few years
hundreds of thousands of people became members of the production organizations.
In 1960 there were 341,000 families, and 380,000 people who chose to be member
of a production organization. Also,
responsible people were named as heads of them. The government taught about
disabled members too. In all of Europe, it was first introduced in Hungary to
have the disabled receive monthly payments. Although originally it was only 260
forints a month, the
psychological influence of being the first on the whole continent to receive
aid was important. In 1961 237,000 more families and 268,000 more people
entered the production organizations. By 1961 there were a total of 4,681 production
organizations, or production organization groups.

The second three-year plan was
formed in 1957, right after the production successes in agriculture. The authors of this plan still kept
industrialization chiefly in mind, and as before the revolution, heavy industry
was treated as the absolute favorite, but this time heavy industry did not mean
only the mining of coal and metallurgy, but rather engineering, electric and
chemical industry were the main targets of investments. So even before the plan’s details were
decided all the authors silently agreed to give special attention to the
manufacturing of diesel-engines, anti-friction bearings, and the research and
development in the telecommunication and the instrument industries. Everyone also
wanted to develop chiefly those industries that the country had sufficient
enough raw materials for, and branches that required higher technical
knowledge, and manufacturing industries of less need for raw materials.

The
congress passed the second three-year plan on June 20, 1958 both in general and
in details. According to it, the
output of industry had to grow by 22% between January 1, 1958 and December 31,
1960. This also included capital
goods, which had to grow by 28% and consumer goods, which had to grow by 20%. This has to be done by, “Az ipari termelés növelésének minden egyes
iparágban együtt kell járnia a műszaki kultúra, a munka termelékenységének
emelkedésével, a minőség javulásával, a kereslethez jobban igazodó áruválaszték
kialakulásával”. (Pp. 441, The growth of industrial
production has to go along with the improvement of technical culture, work
efficiency, quality and the formation of a variety of goods adjusting itself
more to the demand in all industries). The plan wanted 22% growth in mining,
31% in chemical industry, 35% in engineering industry, 60% in instrument
manufacture, 70% in telecommunication industry. Thirty two billion forints had
to be invested by the government in three years.

During
the time of the plan 110,000new
houses were projected to be built, 60% more than during the first five-year
plan. This was planned to be done by loans and by
guaranteeing building materials. Almost 2 billion forints went just for
restoring houses. The plan also
overtook the supplying of 220 villages with electricity. Trade balance was also improved. The pay
off of loans from other communist states had to be started by 1959. Although
this plan was designed well, since the methods of leaders and the way of
carrying out the plan did not change, it actually did not accomplish most of
what was planned in 1956 and 1957.

By
1960 the main projections of this three-year plan started to show signs of
actually being met. Figures were as follows: the governmental and the
organizations’ production grew by 39% in 1960, compared to the 1957’s figures. In three years the number of workers in the
industry grew by 17%. Assets were higher by 24% than in 1957. Two electric power plants were built during
this time. Some older ones were also renovated.

The
second five-year plan was constructed in 1958. The main objective at this time
too was to further improve the army-related industries. The party wanted to
improve the production of such industries, again mostly heavy industry, by
65-70%. The output of
agriculture had a projection to improve by 30-32%. Two hundred to two hundred and five billion forints were
decided to be invested during the next five years. If the Gross National
Product grew by 50%, and the efficiency of working by 37-40%, than the real
incomes were to increase by 26-29%. In
opposition to the other plans, this second five-year plan emphasized improving
the efficiency of already existing plants rather than building new ones.

The
next two decades resulted in the growth of discontent and a crisis in the
system. The slowdown of economic growth, the lagging behind of transportation,
the growing of international debt, and a decrease in the standard of living
characterized these years.

The
system of free, economy, which Hungary was forced to leave and exchange for a
communist economy, was finally restored after four decades and a series of
misdirected and misleading economic plans, which generally hurt the country’s
economy more than it helped it. In 1989 the Hungarian economy went through
radical changes. The politics,
the laws, the ownership, the organizational structures, and the demographic
pictures started to change and are still changing today. The first half of the
1990s was characterized by the breaking down of the socialist economic
structures, and the second half was characterized by the stabilization and the
stimulation of the new system. Up until 1993 the transition was characterized
by the moderation of the economy (the bottom point was in 1991 when it was less
than the previous year’s by almost 12%), but ever since the Gross Domestic Product grows every single year. Since
1997 this growth is above 4% yearly, so
now it is higher than in 1989, when the country became an independent state.
With the exception of a couple strategically important and large enterprises,
by 2000 privatization has been finished. The increasing economic productivity, the becoming internationally more
and more competitive, and a part of the privatization incomes were spent on
decreasing foreign debt. The net liabilities were $11.3 billion, which was more
than 23% of the Gross Domestic Product in 1999. The increased economic growth improves the situation of the country’s
economy, but it is still far behind the most developed countries of the West.
In terms of HDI (Human Development Index, which among others, also considers
the demography and how educated the population of a certain country is) Hungary is the 43rd. (54) Not counting very small countries, in terms
of Gross National Product per person, Hungary is the 21st. Compared to the EU 15, Hungary has a
consumer spending rate of 48%. Including privatized enterprises; the country
now has over 1.1 million registered companies, of which more than 20% does not actually operate. Over half of the
operating companies (442,000) are private companies. There are also 15,000
social security and governmental budgeting organizations. Between 1990 and 1999 there were 21 billion
dollars coming into the country as liquid investment. Two thirds were invested
as a result of the privatization. The process reached its high in 1995, when
$4.5 billion came into the country, due mostly to privatization of
energy-providing companies. By
1998 there where almost 26,000 operating companies that had some foreign
investors in them. Their total
official capital was coming close to 3000 billion forints, of which investors
outside of the country held 2400 billion.

Dominant (above 70%) foreign shares in companies are in the
sectors of money and financing, in the sectors of chemical and instrument
industries, in the food industries, in manufacturing of building materials and
in the energy industry. On the other had their role in agriculture and mining
is insignificant. In the aspect of foreign liquid investment per country,
Germany leads the way with 25%, then America with 15%, and then France,
Austria, Italy, Belgium, Holland, and finally Great Britain closes the list of
the mayor investors into the Hungarian economy.
More than half of the investments went to Budapest. Most of the newly
constructed plants are built in western-, and central Hungary. The existence of
the modern economic system can be seen from the fact that the major
sector of the economic structure of Hungary is the servicing sector. Agriculture comes with 5.5% of the GDP, and
then comes industry with 32.8%, then trade, tourism and transportation together
with 23.4%, and all other services with 38.3%. Agriculture in Hungary employs
7.1%, industry employs 34%, and the services employ 58,9% of all active
workers.

There
are great differences between Budapest and the rest of the country. Fifty six
and a half percent of the companies have foreign investors. 57,3% of all the
Research and Development workers work in Budapest. Budapest is the city of the servicing sector; it produces
only 16.6% of the industrial output of the country. The other region that was
successful in changing is the northwestern region. On the other hand the
changes took quite a time in the northeastern region. In the northwest the
development can be seen even in smaller villages not just in the big cities.
The development of each region shows a west-east slope, which means that as we
move more to the east of the country, we see less development. Industrial parks
were new things in the 1990. In 1999 there were 112 industrial parks in about
100 cities, of
which is mostly in the western part of the country

After
the World War II, for 40 years, Hungary went through a period of a command
economy. In the early 1990s the country got rid of Marxist, and the communist
ideas of how to manage the economy, and formed a free, market economy. Although
still a lot has to be done, both in the field of legal control and regulation
and on the field of economics, Hungarians are proud of their accomplishments.
In the last years a lot of development can be seen.

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